Informal economy unable to cope with Africa’s workforce explosion

Novartis workers protest against job cuts at the pharmaceutical group's headquarters in Basel, Switzerland yesterday. Some of the unemployment pain, even in the developed world, has been been eased by the informal sector. Picture: Reuters

LONDON: Unemployment in Nigeria, sub-Saharan Africa’s largest economy, is running at more than 14% and climbing; in South Africa, the second largest economy, it is more than 27%.

For youth in both places, it is far more.

This may seem bad enough, but according to International Monetary Fund (IMF) calculations, the sub-Saharan Africa region’s job travails are in danger of reaching uncharted territory in less than two decades unless the economies can create jobs for their burgeoning, young population.

In the past, some of the jobs strain has been taken up by the informal economy which is dominated by street vendors, household workers and off-the-radar cash jobbers.

The informal sector in sub-Saharan Africa made up about 38% of gross domestic product in 2010/14, according to the IMF.

This represented a steady decline from nearly 45% in 1991-99, possibly a reflection of more formal growth in some parts of Africa.

However, up to 90% of jobs outside agriculture are still in the informal sector.

It is not generally by desire.

The IMF found that a third of new entrepreneurs in sub-Saharan Africa said they were doing what they were doing out of necessity.

“Most would prefer a job in the formal sector, but don’t have that option,” it said.

The International Labour Organisation goes further.

“Some of the characteristic features of informal employment are lack of protection in the event of non-payment of wages, compulsory overtime or extra shifts, lay-offs without notice or compensation, unsafe working conditions and the absence of social benefits,” it notes.

“Women, migrants and other vulnerable groups of workers who are excluded from other opportunities have little choice but to take informal low-quality jobs.”

For the economy, informal sector work can be positive and negative for growth. In some cases, for example, it represents entrepreneurship and start-up businesses.

But a lot of it is far from opportune for growth. The informal sector tends to be low productivity work, partly because it attracts lower skilled workers.

“In a country where the informal sector is large, the rate of economic growth is reduced,” the IMF said.

This would suggest that countries such as Tanzania and Nigeria, where the informal economy is 50 to 65% of GDP, will fare worse than others such as Mauritius, South Africa and Namibia, where it ranges between 20 and 25%.

Africa is not alone.

At the moment the region where the informal sector plays the biggest role is Latin America and the Caribbean.

It also amounts to about 15% of GDP in developed countries.

However, with the large working age population about to explode, the countries of the region are facing a crunch.

“Countries need to adopt a balanced approach in the design of policies to grow the formal sector.

This means focusing on ways to increase the productivity of the informal sector, while working to support the expansion of formal businesses,” the IMF said.

It also called for improved access to finance to create the right kind of jobs.